"Long-term threats to the public interest"
By Tom Ryan
NEW YORK- U.S. states considering road privatization as a way to close budget deficits risk losing billions of dollars in long-term toll revenue while ceding too much control to shareholder-focused private investors, a report said on Wednesday.
There were 15 roads in 10 states in private hands at end 2008, and 25 states are considering privatizing another 80 roads, according to the report by the Public Interest Research Group Education Fund, a Boston-based public advocacy group.
'Though these privatization deals seem to offer state officials a 'quick fix,' they often pose long-term threats to the public interest,' said Phineas Baxandall, chief author of the report.
The top five states that have privatized roads are Alabama, California, Virginia, Florida and Texas.
The key risks of privatization include bankruptcy, the report said.
'If these business models prove unsustainable, the public may be left with a road operator in bankruptcy who will not invest in maintenance and upkeep, or who will collapse at an untimely moment,' said Baxandall.
Between 1994 and 2006, private companies paid $21 billion for 43 highways using various public-private partnerships.
These deals typically involve long-term leases for new or existing roads that private companies run and collect tolls on. States in return get upfront cash -- but these payments are often too small, the report said.
'The economics of these deals are such that the upfront concession payments are unlikely to match the long-term value of the higher tolls that will be paid by future generations and not collected for public uses,' it said.
For example, Spain's Cintra and Australia's Macquarie will recoup their investment in Chicago's Skyway highway in less than 20 years but collect toll revenue for 99 years, said Baxandall, citing a separate report by NW Financial, a New Jersey investment bank.
Private investors prefer contracts that are at least 50 years long so they can qualify for large tax subsidies. However, the length of such contracts is also risky in that most firms finance the transactions with debt.
A large portion of toll road contracts occurred prior to the credit crisis that struck almost two years ago. Some of the biggest deals were financed with loans that have teaser rates, similar to the risky mortgages that spawned the crisis.
'Some of the biggest deals are financed with interest rates that start low and balloon upwards over time,' the report said.
If private investors are unable to make interest payments, the state can be left with the financial burden.
Meanwhile, putting public roads in private hands could lead to a more 'fragmented road network' and reduce the ability of state governments to prevent highway traffic from being diverted into local communities.
Furthermore, the contracts often require states to compensate private operators for actions that reduce traffic on the road, such as building or upgrading a nearby competing transportation facility, said the report.
Texas had the nation's biggest road privatization program until a public backlash prompted the legislature to enact a two-year moratorium on such deals that expires this spring.
Road privatization efforts failed in New Jersey and Pennsylvania due to similar fears that taxpayers were being shortchanged.
Some states do not allow privatizations, including New York, which has a governor-appointed panel studying the issue.
(Additional reporting by Joan Gralla; editing by Leslie Adler)
© 2009 Thomson Reuters: www.reuters.com
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